These days, the U.S. dollar is about as popular in the financial world as a fur coat at a PETA convention. From China’s Premier calling for a new global reserve “super” currency, to Russia suggesting a return to the gold standard -- faith in the dollar’s ongoing leadership ability is fading fast.
Mostly, the growing anti-dollar sentiment stems from this common belief: The more the U.S. government spends on rescue plans and bailout packages, the less valuable the U.S. currency becomes.
Case in point: On March 18, the Federal Open Market Committee announced its new plan to transfuse an additional $1.15 Trillion into the anemic economy, including the purchase of larger U.S. Treasuries. When the buck plunged 3% on the same day, multiple news sources coined the monetary stimulus the “death knell for the dollar” and wrote:
- “Will The Dollar Remain King? Worries mount that the dollar’s value is being eroded by the steps the US is taking to rescue its economy...” (AP)
- And: “We are facing what I think is one of the most aggressive inflationary periods in our country’s history. The minute the markets sniff inflation, the dollar is going to get whacked.” (Reuters)
YET -- one day later (March 19), the dollar rallied and has been going strong since.
Reality Check: Over the last year, the scent of “inflationary” policy seeping out of Capitol Hill has been stronger than ever. Meaning, the currency market has had plenty of time to “sniff it out” (see second bullet quotation above), yet the dollar’s uptrend has remained intact.
To illustrate this point, my colleagues and I have put together the following chart of the U.S. Dollar Index since May 2008, alongside the most significant bailout measures and stimulus by the U.S. government over that period.
The bottom piece of data bears repeating: Since the bailout binge began in mid-2007, the U.S. government has dished out $12.8 Trillion in cash injections. That’s somewhere between 90% and 100% of annual Gross Domestic Product.
Still, the U.S. dollar has been climbing steadily higher from its 2008 bottom.
In the end, no one captures the bottom line like the March 30, 2009 Short Term Update. In that publication, our analysts address the $1.15 Trillion F.O.M.C. stimulus of March 18 and write:
“It’s the single greatest inflation-creating scheme in the history of the country. What piece of news could possibly be more bearish for the dollar? Yet proving – hopefully once and for all – that news does not create the markets trends, the US dollar index bottomed the next day and has been rallying strongly ever since.”